Menu

scientific investment

For most of human existence, our primary occupation was trying to get enough food to keep ourselves going. Countless millions of manpower-hours have been spent hunting, gathering, farming, and fishing to put food on the table; millions more were spent preparing, preserving, and cooking.

The upshot of this is, we got really good at it. Thousands of years of practice gave us a lot of room for trial and error. We figured out how to create healthy, sustainable diets from practically every environment on the planet. Every culture came up with their own answer for how to feed and support their population. But if you asked any of them why their diet worked, they wouldn’t really be able to give you an answer. All they knew was that this was how they had traditionally made their food. It was an art, not a science.

As humans we are inquisitive creatures by nature, so some of us were unsatisfied by this answer. So scientists began to study what made our food tick. They isolated essential vitamins and minerals and determined their effects on our body. Armed with this knowledge, they devised newer and more “scientific” diets. According to their theories, we could make cheap mechanically processed food and insert vitamins to give us all the nutrition we needed. We would be free of having to slave away in the kitchen and wind up healthier than ever.

Unfortunately, this never really panned out. It turns out we still don’t understand nutrition as well as we thought we did. We’ve revised our nutritional models again and again, and yet we are still not substantially healthier or wiser than we were when we were slaving away in the kitchen doing things the way grandma did.

This is an elucidating story on the limitations of scientific study, but it also has practical applications for our work. Just as our food scientists try to figure out what makes our food tick, financial professors try to figure out what makes our investments tick. They isolate factors that they believe account for investment performance and construct portfolios on the theory that they can reduce holdings to simple factors and whip up a balanced “diet” that has a little of everything.

Sometimes, the theories work. But anyone who thinks that they have unlocked the secret to guaranteed wealth is going to be just as disappointed as the food scientists who were certain they had unlocked the secret to guaranteed health.

We believe that we are likely to do better by sticking to the same timeless investment principles that our predecessors in the market made their money by. We are not Luddites—we are more than happy to include scientific investment analyses in our research. But we still believe that investment is as much art as it is science.

Perhaps someday in the distant future someone will manage to reduce investment success to an algorithm. Until then, we will trust our “artistic” judgment over what a computer tells us we should buy. If you would like to have an unscientific discussion about this or any other money topic, please call or write.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.